Foto: Unsplash, Flickr, Creative Commons. Project Bonds, la palanca que transformará el mundo
5 new investors, for a combined EUR 147m, have joined the BRIDGE platform -a platform with funds that invest in debt related with infraestructures owned by Edmond the Rothschild AM- through BRIDGE II, a Luxembourg-regulated fund launched at the end of March 2016. Less than 2 years after its first closing, the BRIDGE platform has raised close to EUR 1bn through 3 funds, of which EUR 400m in 2016.
Persistently strong institutional demand
The first closing of BRIDGE II at the beginning of December involved new investors based in Italy, Germany and France and should enable an interim closing at the beginning of 2017 as investors are currently at an advanced due diligence stage. BRIDGE II is expected to complete its fundraising in the course of Q2 2017 and for a similar amount as FCT BRIDGE I (BRIDGE I).
“For institutions looking for yield in today’s low interest rates environment and amid ongoing banking disintermediation, high asset quality along with low volatility and stable cash flows over long maturities represent very solid fundamentals”.
As with BRIDGE I, this second generation fund, which is managed by the same London-based team of 11 experts, seeks to broaden the platform’s range and capture new opportunities among the vast universe of available infrastructure assets.
At the end of 2016, The BRIDGE platform comprises three funds representing an aggregate amount of close to EUR 1bn under management.
Strong momentum in commitments
The commitments from BRIDGE II’s initial investors also mark the beginning of the fund’s investment period. Three investments have already been structured and closed just before the Christmas break.
These first crystallised opportunities see the BRIDGE platform reinforce its position in the social and telecoms infrastructure, the latter via a first investment in a fibre optic PPP (Public Private Partnership) in France. A new opportunity in the renewable energy sector is being structured and should close soon, confirming BRIDGE’s focus on this sector.
In a very active year for the platform, these newly closed opportunities take the number of investments in 2016 to 10. BRIDGE I, 94% invested, is also finalising its investment period -one year ahead of schedule-.
The investment team’s strong relations with sponsors give it access to a wealth of diversified opportunities and enable it to act as lead arranger in major infrastructure projects financings.As the team investsonlyon behalf of its clients, this allows it to select high-quality assets with attractive credit margins and maximise investor protection in line with investment mandates.
Both fund vintages can act in concert through co-investments to access opportunities requiring significant investment capacity.
Photo: LinkedIn. Jimmy Ly Will Join Robeco in Miami as Head of Sales US Offshore & Latin America
Jimmy Ly, part of Pioneer Investment’s sales team in Miami, will join Robeco on January 17th. Funds Society has learned that Ly will join Robeco’s Miami office as Executive Director heading the Americas Sales Team (US Offshore and Latin America). Ly will succeed Joel Peña, who recently left the company.
According to Robeco, Jimmy Ly will be join Robeco as new head of Sales US Offshore & Latin America reporting to Javier García de Vinuesa. He will be responsible for maintaining, developing and expanding existing relationships with Robeco’s current client base and the main players in the America’s offshore region, and for acquiring and developing relationships with new clients which lead to new business opportunities.
Jimmy will continue working at Pioneer Investments until January 13th to help with the transition process to the rest of the team.
Jimmy started his career in 1998 as Mutual Funds Relationship & Product Manager at Merril Lynch in New York. He relocated to Singapore to manage and accelerate Merril Lynch´s mutual fund sales and marketing business in Asia.
In 2002 he joined Pioneer Investments as Regional Sales Manager in Los Angeles and Miami. During his last two years at Pioneer Investments he was Senior Sales Manager.
Jimmy holds and MBA International Marketing from Loyola Marymount Univesity Los Angeles and a Bachelor of Arts from the California State University in Northridge.
CC-BY-SA-2.0, FlickrPhoto: DD. The Road to Retirement is as Important as the Destination
If you use the GPS map application Waze then you know that there are usually multiple routes to a destination, and that each could provide an experience remarkably different than the others. You could follow the easiest route and make it to your location on time and without stress, but you could also get stuck in heavy traffic, because you choose “shortest route” on the app instead of “fastest route.” Or, seeking to save time, you could choose the fastest route but find yourself in a confusing maze of one-way side streets littered with potholes.
Employees participating in defined contribution retirement plans also take different routes to a common destination — retirement — and have different investment experiences along the way. A primary driver of a plan participant’s experiences is asset allocation, and the widespread adoption of target date and other default strategies used for that purpose is well documented. What is surprising, however, is that even with the proliferation of Target Date Funds (TDFs), more than three- quarters of retirement plan assets are still invested in individual core menu options, as shown below in Exhibit 1.
This has motivated some plan sponsors to enlist “white label” strategies for help. White label strategies contain one or more funds that are stripped of company and fund brands and replaced with generic asset class names or investment objectives such as “income” or “capital preservation,” among others. These solutions aim to improve core allocations (by making plan choices simpler), create more diversified portfolios and be more cost effective.
Aligning white label solutions with participant DNA
You can take a white label strategy a step further by aligning the type of investment experience the strategy will deliver with factors like participant perceptions of investing and plan demographics. In other words, you can build investment strategies that make the journey to retirement a bit more pleasant. The general characteristics, or “DNA,” of participant bases can vary greatly. Many DC plans, for example, have growing numbers of millennial workers (those born between 1980 and 2000) among their ranks. Having started their savings years with the bursting of the tech bubble followed by the global financial crisis, millennials tend to be conservative investors and concerned about losing money despite their long-term investment horizons. They have the same amount invested in cash and fixed income assets as older generations do. Plans with a significant millennial participant population should consider options that aim to limit losses in challenging market environments while still providing the growth opportunities critical for younger investors, given their long journey to retirement ahead.
By tailoring white label investment options to the characteristics and unique needs of a particular demographic or work force, the solutions can be optimized to deliver an investment experience that can drive better long-term outcomes for participants.
How can you determine what type of investment experience is most appropriate for a given population? Exhibit 2 provides some examples of factors plan sponsors can consider when evaluating the best approach for their plan. White label solutions incorporating these factors may help participants stay invested through various market conditions.
For most, there isn’t a perfect route to retirement. There are inevitable bumps and detours along the way. You can find ways to make the ride easier and less anxiety-provoking, however. Since plan demographics, behavioral beliefs and investment committee dynamics vary from plan to plan, these factors can play a role in determining the appropriate investment experience for a group of participants.
Demographic considerations such as age, employee turnover and the presence of a Defined Benefit (DB) plan are important drivers, while behavioral factors including loss aversion, engagement and professional profile are also important. Additionally, you should consider investment committee beliefs around expressing investment views and the role of a core menu. Taking all of these factors into consideration can help you optimize white label portfolios for your participants. While getting participants to their retirement destination is critically important, you can’t ignore the journey they will take to get there.
Kristen Colvin is a director of consultant relations at MFS Institutional Advisors, Inc., the institutional asset management subsidiary of MFS Investment Management® (MFS®).
CC-BY-SA-2.0, FlickrPhoto: Henry Jager. Three Main Concerns for EM in 2017: Potential Protectionist Trade Policies, Rising Rates and a Strengthening US Dollar
According to Goldman Sachs Asset Management, Donald J. Trump’s victory in the US election has fuelled three main concerns for Emerging Markets (EM): potential protectionist trade policies, rising rates and a strengthening US dollar. The surprising result created uncertainty for EM, which is reflected in equity market performance and flows since the election: the MSCI EM Index is down 5%, underperforming developed market equities by almost 7% and suffering the worst week of underperformance since the financial crisis. EM equity flows have also sharply reversed; outflows hit $7bn in the week following the election – equating to one third of YTD inflows.
The firm believes the initial market reaction is underappreciating the diversity of the EM opportunity set and the wide- ranging impacts of trade policy, rising US interest rates and a strengthening dollar on each of the 23 economies in EM. They also think investors may be overestimating the potential for campaign promises to become actual policy.
In their view, the long-term case for owning EM equities – portfolio diversification and alpha potential – remains intact.
The Possibility of Protectionism
EM has been the low-cost manufacturer to the world since the early 1990s. If the US introduces protectionist policies, most likely in the form of tariffs on imported goods, many EM economies could be negatively impacted. Crucially, the US may also experience sizeable repercussions. In fact, the introduction of tariffs – and resulting retaliatory measures from countries like China – could cause up to a -0.7% hit to US real GDP growth.
The firm is not convinced that tariffs would bring trading partners “to the negotiating table” – as is often cited using the example of Ronald Reagan’s 45% tariff on Japanese motorcycles in the 1980s – they would more likely result in trade wars and counter-protectionist acts. The Chinese government has already suggested that it is open to letting the country’s US dollar peg relax and is threatening to stop the import of key US products – actions that could further undermine growth in the US.
The firm could see aggressive government concessions for firms willing to keep manufacturing in the US and tariffs in specific industries where US manufacturing has suffered most. If the Trump administration is slightly more pragmatic than the market has assumed then investors may feel more assured that the EM growth model is still intact. They believe there could be a difference between campaign rhetoric around protectionism and actual implementation as policy makers may be constrained by economic realities such as negative consequences to US economic growth. The introduction of unilateral tariffs could have lasting negative consequences for the US and could undermine what has been widely considered part of President-elect Trump’s mandate: to improve the economic position of the US working class.
The Risk of Rising Rates
Since the election, inflation expectations and US government bond yields have increased. Rising US interest rates will mean higher funding costs for EM debt and increased pressure on EM economies. In addition, higher US rates and a waning search for yield could reduce foreign investment into EM, which has lowered funding costs and supported increased consumption and lending in EM economies. These are clearly headwinds for EM growth.
An end to the ‘low rates, low growth’ environment may not be as negative for EM as markets may be suggesting. If rising rates are the result of an improving growth backdrop in the US, it should be supportive for EM economies. Since 1980, EM equities have outperformed developed markets on average by 11% during Fed rate hike cycles, including three of the past four cycles. This scenario played out during the last Fed hike cycle between 2004 and 2006 – the Fed raised rates by 425 bps in less than two years, but it coincided with a strengthening US and global economy that supported a sustained rally in EM equities.
The debt profile of EM countries has also changed meaningfully in recent years. In 2000, the vast majority of debt issued by EM countries was in US dollars. Today, over two-thirds of all EM sovereign debt is in local currency. This typically reduces any potential instability and should make EM more resilient to rising rates. There will be greater headwinds for those countries and companies that have only been able to drive growth in recent years because of cheap, easy money in developed markets. In our view, companies with more sustainable long-term growth models can differentiate themselves in this environment.
Rising rates will highlight fragilities in EM and put pressure on companies with weaker governance practices who have attempted to take advantage of the lower rate environment in the US. However, if the cyclical recovery in earnings and return on equity that has materialized in 2016 can be supported by a better global growth backdrop, then there is reason to be constructive on EM equities going forward.
The 1980s Dollar Revival?
A further concern post-election has been the idea that we are once again in a bull market for the US dollar.
Many commentators have compared the prospects for the dollar to what was seen in the Reagan years of the 1980s, namely a multi-year, close to 100% rally. Goldman Sachs AM believes the US dollar has scope to further strengthen, but the magnitude may not mirror the 1980s because the starting points are very different. When Reagan came to power in 1981, the US was trying to pull itself out of recession, inflation had reached almost 15% and the dollar had fallen by roughly a third over the prior decade. More recently, the backdrop has been years of consistent dollar strength. In fact, following almost nine years of depreciation, EM currencies are trading at a discount of ~15% relative to fair value.
Furthermore, the primary driver of EM equity returns historically has been corporate fundamentals, not currency. In fact, over the past fifteen years, EM FX has been a slight detractor from total returns, but this has been comfortably offset by earnings growth. We see encouraging signs that EM earnings and returns on equity are picking up from cyclical lows and continue to believe that this can be the major driver of the asset class going forward, offsetting any potential currency headwinds.
Outlook and Opportunity: Stay the Course
EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar. The firm´s view is that these risks will not be as prevalent as initially feared.
Despite increased uncertainty, the key reasons for investing in EM, namely the diversification and alpha potential, are both still intact. In fact, they believe these benefits are potentially enhanced given that the market appears to be discounting the diverse, heterogeneous nature of the asset class.
Fundamentals are recovering
Fundamentals in EM are also far stronger than at the time of the 2013 Taper Tantrum when the asset class sold off following the Fed’s tapering of quantitative easing, although the market reaction has been similar.
The growth premium relative to developed markets has begun to reappear, external imbalances have been reduced, inflation remains benign and EM FX is more attractively valued than it was in 2013. Finally, we have seen the earnings and returns cycle turn positive in the past six months and earnings expectations continue to support a mid-teens earnings outlook for 2017. Historically this has been the key driver of EM outperformance.
On a forward price-to-earnings basis EM still trades at a 25% discount relative to developed markets. In absolute terms, EM appears to be returning to its long-term average, though we believe this is largely the result of significant earnings declines over the past few years, which have inflated the multiple. This is most apparent when observing a cyclically-adjusted price-to-earnings ratio, which shows EM is comfortably in the bottom quartile relative to its long-term history.
As such, while it is reasonable to argue that EM is not extremely cheap, the firm believes that long-term investors are able to access the market today at an attractive level for what could be cyclically suppressed earnings.
Selectivity is critical
EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar.
Their view is that these risks will not be as prevalent as initially feared. EM equity returns have historically been driven by corporate fundamentals rather than currency, suggesting the uptick that we have seen in earnings and ROEs suggests that there is significant growth potential for the asset class. In their view, an actively managed investment approach, focused on mitigating the structurally-impaired parts of the EM universe, is a potentially effective way to access this growth potential over the long-term.
Pixabay CC0 Public DomainPhoto: mainblick. M&G: We Have Arrived at a Pivotal and Potentially Critical Moment in Time
For the M&G Multi Asset team, 2016 was not so much about learning new lessons as being reminded of some of its key rules for investing: avoid getting caught up in short termism, do not waste time on forecasting, and beware lazy assumptions about what ‘should’ happen based on previous experience.
They consider Brexit and Trump have been surprises, but even if we could have predicted the results, subsequent price action went against the consensus view. Markets bounced back quickly from an initial ‘Brexit’ sell-off and the ‘risk-off’ volatility expected to be triggered by a Trump victory in the US presidential elections did not materialize.
The team feels this demonstrates the point that it is more important to focus on the facts we can know today about asset pricing and the fundamental economic backdrop, than attempting to predict how geopolitical events will be interpreted by the market. In their opinion, it also proved that no asset will be a ‘safe haven’ at all times, as mainstream bonds sold off strongly after the US election, from the historically low yields they had reached in the summer of 2016. This supports their view that the risk characteristics of asset classes are not static, rather value should be the starting point of assessing risk.
“We have arrived at a pivotal and potentially critical moment in time, where a material change in investor thinking and behavior is needed. The strategies that have been successful for the last decade are now likely to struggle”. They say.
So when looking ahead to next year and beyond, it is not about predicting what events will dominate headlines, but about being ready to respond to the changing mood of the market. The team adds: “The biggest risks investors will face next year are probably ones that we are not even aware of today, or that have faded from the headlines.”
The market appears to be pricing in a more favorable environment, with profits picking up globally and positive trends in data such as Purchasing Managers’ Indices and employment in certain areas. There is also a perception of inflation picking up and we have seen breakeven move a long way.
“While global equities in aggregate may not be as compellingly valued as at the start of the year, there are still very attractive opportunities at regional and sector level. We are still strongly favouring Europe and Asia (including Japan), as well as US banks. There are also plenty of interesting opportunities within non-mainstream government bond and credit areas of fixed income.” They conclude.
Courtesy photo. Deutsche AM appoints Petra Pflaum as CIO for Responsible Investments
Deutsche Asset Management has announced the appointment of Petra Pflaum as Chief Investment Officer for Responsible Investments, effective immediately.
In this new role, Pflaum will manage a dedicated Environmental, Social and Governance (ESG) team responsible for the further integration of Deutsche AM’s ESG capabilities into its investment processes and growing its client offerings across its Active, Alternatives and Passive businesses. The existing ESG thematicresearch and governance teams will report to her.
Pflaum will continue in her role as EMEA Head of Equities for Deutsche AM, and will be joined by Britta Weidenbach who will become EMEA Co-Head of Equities effective immediately. Pflaum will also become a member of the Management Board of Deutsche Asset Management Investment GmbH representing Deutsche AM’s Equity and Equity Trading businesses.
Pflaum joined Deutsche AM in 1999, and prior to her current role served as Co-Head of Global Research and Global Head of Small & Mid Cap Equities. Weidenbach is currently Head of European Equities and has also been with Deutsche AM since 1999. She has managed European equity funds since 2001.
Nicolas Moreau, Head of Deutsche Asset Management and Member of the Deutsche Bank Management Board, said: “Deutsche AM has recognised the importance of ESG within its investment approach for many years. We are proud to have been amongst the early signatories to the UN supported Principles for Responsible Investment (PRI) in 2008. It is important we build on this heritage, and use our expertise to help clients who want support in this important investment area.”
“I am delighted that someone of Petra Pflaum’s capabilities will take on this important position as CIO for Responsible Investments and member of the Management Board for Deutsche Asset Management Investment GmbH, and that Britta Weidenbach will join her as EMEA Co-Head of Equities. Both are outstanding talents who have held a number of leadership roles over many years within Deutsche AM.
Pixabay CC0 Public DomainPhoto: Pexels. American UHNWI Prefer to Own Vacation Homes in Mexico, Bahamas, UK, France, and the Caribbean
Ultra high net worth (UHNW) clients in the U.S. tend to own multiple houses overseas, with North and South America the most popular locations for their foreign properties, according to a study of proprietary data by AIG Private Client Group, a division of the member companies of American International Group.
The study’s findings helped the company develop a new multinational property coverage that serves U.S. UHNW clients with considerable overseas assets.
The AIG Private Client Group data looked at trends with clients who pay in excess of $250,000 in annual personal insurance premiums. These clients have particularly complex coverage and service needs to go along with their extensive global and domestic assets.
This population owns nine homes overseas, on average. Mexico, the Bahamas, and the Caribbean are three of the top 5 locations for these properties, accounting for 36% of the overseas home count. Two of the top five locations are in Europe. Overall, more than 50% of the homes owned by this group are in the Americas. The breakdown of the top countries follows:
Mexico – 14%
Bahamas – 13%
England – 12%
France – 9%
The Caribbean – 9%
This study also found that this segment of UHNW clients also has on average:
19 regular-use vehicles
$1.7 million in jewelry insured
$19.6 million of fine art insured
The new AIG Private Client Group offering responds to these findings. It represents an important multinational collaboration between AIG’s Commercial and Consumer Insurance segments. It combines the policy service systems and global presence of AIG Commercial’s multinational insurance platform with the high-touch customer service and claims expertise of AIG Private Client Group.
“No other insurance provider in the high-net-worth space can provide this level of service in their global coverage,” said Gaurav Garg, President and CEO of Personal Insurance. “With AIG’s vast global footprint and capabilities, we are able to take another step forward in our commitment to being our clients’ most valued insurer. We are able to provide our high net worth customers with the AIG Private Client Group claims and underwriting experience that they are accustomed to, whether their homes are in the U.S. or overseas.”
In most cases, U.S. UHNW clients have had to rely on multiple coverages offered by different insurance providers spread across the globe to insure their overseas property, making it challenging for both clients and their insurance agents to access cohesive protection. With the AIG Private Client Group offering, however, clients can access coverage through one provider and also benefit from AIG’s risk mitigation and claims expertise.
Multinational property coverage complements other AIG Private Client Group offerings that are inherently global, including private collections, personal excess liability, and yacht insurance policies.
The coverage is also available to AIG Private Client Group clients with substantial assets but a smaller global footprint.
Pixabay CC0 Public Domain. A Mixed Bag, Not A Game Changer
In recent weeks, the market has been abuzz with talk about a rotation in the equity markets from more defensive sectors like utilities, REITS and large-cap multinationals to “riskier,” cyclical sectors. While a rotation is clearly underway, I question the durability of the current trend.
This rotation began in September, when economic data began to confirm an upturn in the pace of US growth, and picked up after the US presidential election. The election gave the market a shot of adrenalin, with investors anticipating lower taxes, less onerous government regulations and a significant increase in infrastructure spending, which theoretically should improve the pace of economic growth. In the post-election environment, beaten-down, lower quality sectors such as banks and industrials — owing to higher debt levels and less-certain cash flow generation abilities — took on market leadership roles.
Let’s put the recent price action into context. Historically, there is a bias for stocks to rise in the fourth quarter of the year, the so-called “Santa Claus” rally. In addition, stocks tend to rise for three to four months immediately following the quadrennial US presidential elections. However, the rotation we are seeing from growth to value this year is atypical.
Sustainably in question
Given all the buzz, it is natural to ask if the so-called Trump rally is sustainable. I doubt it. Here are a few reasons why:
Hedge funds, which have on average badly underperformed their benchmarks in recent years, have been largely responsible for the much of the recent market movement, stepping on the gas in an attempt to improve their performance figures and setting off a highly leveraged momentum-driven trade into cyclicals and riskier companies.
Day traders are back in force. After sitting out much of the nearly seven-year-old bull market, day trading volumes have increased substantially in recent weeks, lately exceeding institutional volume, according to trading volumes reported by discount brokers.
Retail participation has picked up too. That tends to be a late-cycle phenomenon, as the average investor tends to buy during periods of euphoria and sell during times of despair.
The recent modest earnings rebound witnessed in the third quarter is unlikely to last. Higher energy prices, the dramatically strengthening dollar and rising interest rates are all headwinds to earnings and economic growth. These factors could work to offset any fiscal stimulus from Washington next year. Plus, given the advanced age of the present business cycle, history suggests that it would be prudent to expect a potential recession at some point during Trump’s first term.
Beware of narratives
Market narratives can be powerful, but they can also be misleading. Recall the narrative in early 2009, at the trough of the global financial crisis. The economy was too fragile and the financial system was under too much strain. It was thought that in such an environment earnings growth going forward would be anemic, if not impossible. Investors ran scared and many did not return until recently.
That was precisely the wrong approach. Had investors looked past the gloom, they would have realized that policymakers around the world were making an extraordinary effort to heal financial markets and economies. And heal them they did. We experienced incredible earnings growth as markets recovered from the crisis.
Now, years later, the narrative is somewhat euphoric. But I was skeptical of the negative narrative after the crisis, and I am skeptical of today’s euphoria. And euphoria is often a late-cycle phenomenon.
In my view, it is important to keep an eye on several inhibitors to growth that could prove the euphoric market narrative premature, if not wrong. The global economy continues to face a mountain of debt, and depending on the policy mix embraced by the new administration, that mountain could grow more quickly. We face the substantial demographic challenge of an aging, less productive work force.
While lower personal and corporate taxes and a boost to infrastructure spending will likely be accelerants to growth, they are not enough, in my view, to offset the factors that have constrained both US and global GDP for nearly a decade. Perhaps government actions will extend the present cycle for a while longer, but it is unlikely to shift it into a higher gear. For example, given the recent experience with tumbling energy prices, it is unclear that tax cuts will lead to increased consumption. The so-called energy dividend ended up being spent on things like health care rather than on other goods and services. Tax cuts will likely be treated similarly, in my view.
Quality wins in the end
To be sure, some of the recent rotation makes good sense and will likely endure. Bank stocks are likely beneficiaries of a looser regulatory regime and higher interest rates that fatten net interest margins. Energy companies, particularly coal producers, will like find life easier in the new environment.
In my view, what lays ahead is a mixed bag, but not a game changer. I do not see a dramatic uptick in economic growth from the new administration’s policies. Against this backdrop, I continue to prefer high-quality companies with track records of solid cash flow growth, strong balance sheets and high returns on equity. They have a long history of beating market averages over time. I think they will still win out in the long run.
CC-BY-SA-2.0, FlickrPhoto: Steve Snodgrass
. Let’s Stick To The Knitting
Sometimes politics influences economic factors, sometimes it does not. Former President Ronald Reagan was a great champion of supply-side economics, using the work of leading economists such as Friedrich Hayek to provide theoretical justifications for his political actions. But I have to admit to a sense of frustration that has been growing steadily all year whenever anyone starts to talk to me in the workplace about politics.
Remind me, at what point did we all become self-styled experts, ready to voice our opinions on issues ranging from Brexit, Trump, the Italian referendum, and the likely fortunes of Marine Le Pen in next spring’s French presidential elections? At what point did stock market chatter over corporate earnings, valuation multiples, and a hearty debate on a company’s outlook make way for the latest opinion-poll gazing?
Up until very recently, when Mariano Rajoy was returned as prime minister of Spain, the country was without a government for over 10 months. In that time, Spanish GDP growth did not stop, registering 0.8% in the first two quarters of 2016 and marginally lower growth of 0.7% in the third quarter. A prime example, if ever there was one, of there often being no link whatsoever between politics and economics.
Nor is the correlation between underlying economic growth and the performance of equities clear-cut. A company’s earnings are not analogous to GDP growth. Just because an economy is doing well, or badly, does not necessarily mean stock markets should follow the same fortunes.
Just to reinforce the point when looking at smaller companies, here’s how it works in practice. The profitability of Prosegur, the Spanish securities and cash management business, is dependent on the growth in the European alarm market and the cash-in-transit market in Latin America. Revenues for another Spanish group, Viscofan, the sausage skin casings’ manufacturer, are driven solely by the global demand for protein. Get the picture?
Irrespective of the economic landscape, our investment strategy, a blend of value and growth styles, favours companies benefiting from structural growth situations, turnaround positions and cyclical businesses; admittedly the latter are more related to the fortunes of the economy.
A good example of the structural growth theme is in the area of European outsourcing. Large companies, constrained by red tape, have achieved greater flexibility using this method across a wide range of industries, including IT, engineering, software and automotive systems.
Turnaround situations are a particular feature of European building material manufacturers. An industry known for its operational gearing, companies have continued to pare down costs since the global financial crisis. When sales eventually reach levels more akin to their long-term average, bottom line growth should be significant.
At the start of each year analysts tend to start with optimistic forecasts for European earnings growth, only for them to be continuously downgraded in subsequent months. So when I say that growth for European smaller companies for 2017 should be around mid-teens, colleagues start to look sceptical.
But here’s the mathematics. Rising employment is continuing to propel the eurozone region towards 2% growth. Add 1% inflation, the effect of prior year acquisitions, and the general growth premium of smaller companies gets us to around 6% revenue growth. Then add in falling input costs, some acquisition benefits and a dollop of operational gearing and there you have it. An asset class which, despite all the political shenanigans going on around it, is managing decent growth.
So, next time you are tempted to talk politics, opinion polls, and the vagaries of the US Electoral College system, try restraining yourself, however tempting. No one knows how key political events are going to transpire, just as much as no one knows what the stock market’s reaction to those events is likely to be. As investors, let’s try to stick to the knitting and focus on company fundamentals.
Ian Ormiston is a manager, Old Mutual Europe (ex-UK) Smaller Companies Fund.
. Pioneer: 'In China we still see a more stable overall picture than in other emerging markets’
Yerlan Syzdykov, head of fixed income and high yield strategies for emerging markets at Pioneer Investments, explains in this interview his vision for emerging debt in the coming year and the reasons why his team rather invest in Asia over Latin America.
What is your outlook for Emerging Markets Debt for 2017?
We are forecasting a pickup in growth in Emerging Markets in 2017. However, of course, the outlook from the returns perspective could be influenced by what’s happening in the U.S., given that interest rates have started to move upwards and that could really add pressure in terms of real returns. So, we think we are looking at low positive returns from emerging markets, and we believe that we are probably going to see flat performance in terms of local currency.
Within Emerging Markets Debt, will Government or Credit market be more interesting next year?
They are going to be broadly the same in terms of performance, by our estimates. We still have a preference for government debt next year. We believe that there is a little bit of inertia in terms of growth that will still put pressure on corporates. Higher refinancing rates are probably something that we need to be aware of in 2017 and 2018. So, we are looking at the higher default rates that we are forecasting for corporates compared to sovereigns and therefore, our preference is with sovereign debt.
How does the outcome of the U.S. elections affect Emerging Markets Debt?
We are all used to watching the monetary policy of the U.S. as it so important for us. Now, we are starting to see a shift in fiscal policy, in foreign policy and potentially also in trade policy. That could potentially have a negative impact on emerging markets in the long run. However, of course, we need to see how urgent those changes could be and what shape they will take. So, overall, we are going to be monitoring those changes and readjusting our positioning accordingly.
What regions could provide the most interesting opportunities in 2017?
We still see the opportunity to grow in Asia given the structural reforms that we have seen in countries like India and even in China, which are still supporting a good growth story. We are seeing more volatility in Latin America as we are witnessing the impact of lower commodity prices potentially, especially in metals (at least initially). We are also looking very carefully at the negative credit re-rating cycle in Eastern European markets, which would also be affected by political volatility in Europe itself. Therefore, we prefer Asia.
What’s your view on China’s economy and leverage levels?
We have seen some investors getting worried given the 20% growth in leverage levels just to sustain that level of growth. We are looking for some more structural reforms, especially in state-owned enterprises (SOEs), something that has not really happened yet, and we are probably going to see a bit of a slowdown in that structural reform drive given that the beginning of the political succession in China. So, therefore, Chinese growth may underperform somewhat, but we still see a very healthy and more stable overall picture compared to other spaces in Emerging Markets.
What is your view on EM currencies?
Although we see a pickup in growth in the emerging world, the differential between emerging markets and developed markets is still shrinking, especially if we are looking at the prospect of higher U.S. growth next year and lower productivity growth in the emerging world going forward. That means that currencies are probably not going to be appreciating strongly against the U.S. dollar – we are moving into a strong dollar world if the reforms in the U.S. are going to take place. Therefore, there is probably going to be a little bit of upside in dollar versus emerging currencies so we will be very cautiously positioned in local currencies this year.
